Budget myths and mischief

During budget time, many myths and misconceptions regarding the federal deficit are reported. This week was no exception.

President Bush’s $2.4 trillion budget for fiscal 2005, which begins in October, forecasts a deficit of $521 billion — a scarier-sounding number than it is.

Economic analysts measure deficits and budgets in terms of the overall size of the economy, which is nearly $11 trillion a year. So we are talking about a budget deficit that is about 5 percent of the gross domestic product — a level of additional short-term borrowing our economy can easily absorb. In fact, the deficit is relatively small as a share of the GDP than it was during recessionary periods, when it spiked upward.

Deficit hawks ascribe all sorts of horrible things to the budget deficit without providing any evidence to back up their claims. Among them:

The deficit will endanger our economy: But the economy is in the midst of very strong growth — 8.2 percent in the third quarter, 4 percent in the fourth quarter, with forecasts of stronger growth in the months to come.

The deficit-mongers made the same hysterical, sky-is-falling claims during the 1980s. But the economy roared back from the 1981-82 recession, producing 4 percent, 5 percent and 6 percent growth. Ronald Reagan’s deficits did not hold back the economy or hurt the government’s fiscal position. Mr. Reagan’s tax cuts spurred growth and big increases in job creation, which produced higher tax revenues, helped shrink the deficits and eventually led to the budget surpluses of the 1990s.

Higher deficits will push up interest rates, and that will sandbag the economy: But interest rates are low across the board and show no signs of any serious increases in the foreseeable future. There has been and will be some slight increases, but this is due to economic growth, not the deficits.

Higher deficits will heap huge tax burdens on future generations: But, as we saw with the surpluses of the late 1990s, which surprised the experts, the American economy is capable of showing enormous strength when stimulated. And, clearly, Mr. Bush’s tax cuts are the chief stimulative force growing this economy.

President Bush’s budget forecasts the $521 billion deficit will be cut down to $237 billion in five years, but I see even that forecast may be too conservative. We saw in the late 1990s that a fast-growing economy is capable of very fast tax revenue growth when budget officials predicted the surplus would pay off the public debt faster than a 30-year mortgage.

Economic growth will be the big factor in bringing down the deficit, as the economy expands and federal tax revenues rise faster than spending. Another factor in all this will be the budget’s proposals to slow the rate of spending for all nondefense, non-homeland security discretionary spending to less than 1 percent.

Criticized by conservative budget hawks for his high spending levels, Mr. Bush’s budget would eliminate more than 65 federal programs and hold many more to no growth or very modest growth. Whether he will get his spending cuts from Congress remains doubtful, because each one of those programs has a furious special interest behind it. But the overall effort should slow the spending rise appreciably as the economy grows — a fiscal one-two punch that always cuts deficits down to size.

Mr. Bush’s Democratic critics denounce his deficits. What they don’t say is that they would spend even more. Despite all the criticism that the president’s Medicare prescription drug plan costs too much, a Democratic alternative would have cost twice as much.

The president’s prescription drug reforms are still too costly and do not have enough competitive market systems built into them, but the main costs will be put off several years. The program will have little or no effect on today’s spending, allowing the economy to recover in time to pay its bills.

Where Mr. Bush spends big time is for defense to fight the war on terrorism and for homeland security to prevent another September 11-type attack.

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